Optimizing Valuation of Accounts Receivable
23-04-2021 5 min read
One of the challenges every Accounting department is faced with when closing the books is making a realistic valuation of a company’s accounts receivable. The accounting principle of conservatism, or prudence, requires companies to report their accounts receivable at their net realizable value, which is the amount that is likely to turn into cash. If a company is aware of any risks that indicate that some of their accounts receivable will not be collected in full, they are required to record only the amount they anticipate to collect on their balance sheet. While there may be specific accounts that are known to be doubtful, which companies can make a specific allowance for or choose to write off directly, companies should make a general allowance for doubtful accounts (flat-rate value adjustments) to have their balance sheet reflect the overall risk that is contained in their accounts receivable portfolio and that is not always easy to identify.
Determining the Actual Allowance Needed – A Major Challenge
More often than not, it is very time-consuming, if not at all impossible, for companies to determine a reliable basis on which to assess the true value of their accounts receivable, which makes an ongoing monitoring of their receivables portfolio from a risk perspective an impossible task to accomplish. As a consequence, risks are not detected until it is too late and it becomes more likely that a company is unable to collect on all of their accounts receivable and has to make a higher allowance for uncollectible accounts. This is why companies need the support of a sophisticated tool that gets them up to the task of correctly determining the needed allowance for doubtful accounts and handling all the activities involved. Software support simplifies and automates process workflows and reduces the burden of manual tasks. This frees up resources for finance divisions to focus on identifying and assessing receivables-related risks proactively and ahead of time so as to be able to control and steer them properly.
Reliable Accounts Receivable Valuation Helps in Identifying and Managing Risks
Making a correct and reliable valuation of a company’s accounts receivable is an essential component in any effective risk management system. At the same time, it ensures compliance with the German Control and Transparency in Business Act (KonTraG) and with GAAP rules in general. Having the technical support of a state-of-the-art business software solution is absolutely necessary if companies are to successfully face the challenge of controlling the complexities of the accounts receivable valuation process as well as identify and effectively manage risks to their business.
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